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- Publisher Website: 10.1016/j.jfineco.2020.05.010
- Scopus: eid_2-s2.0-85102752038
- WOS: WOS:000661321500012
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Article: Volatility, Intermediaries, and Exchange Rates
Title | Volatility, Intermediaries, and Exchange Rates |
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Authors | |
Keywords | Volatility Financial intermediaries Exchange rates Currency returns Value at Risk |
Issue Date | 2021 |
Publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfec |
Citation | Journal of Financial Economics, 2021, v. 141 n. 1, p. 217-233 How to Cite? |
Abstract | We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus-Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data. |
Persistent Identifier | http://hdl.handle.net/10722/297207 |
ISSN | 2023 Impact Factor: 10.4 2023 SCImago Journal Rankings: 13.655 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Fang, X | - |
dc.contributor.author | Liu, Y | - |
dc.date.accessioned | 2021-03-08T07:15:41Z | - |
dc.date.available | 2021-03-08T07:15:41Z | - |
dc.date.issued | 2021 | - |
dc.identifier.citation | Journal of Financial Economics, 2021, v. 141 n. 1, p. 217-233 | - |
dc.identifier.issn | 0304-405X | - |
dc.identifier.uri | http://hdl.handle.net/10722/297207 | - |
dc.description.abstract | We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus-Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data. | - |
dc.language | eng | - |
dc.publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jfec | - |
dc.relation.ispartof | Journal of Financial Economics | - |
dc.subject | Volatility | - |
dc.subject | Financial intermediaries | - |
dc.subject | Exchange rates | - |
dc.subject | Currency returns | - |
dc.subject | Value at Risk | - |
dc.title | Volatility, Intermediaries, and Exchange Rates | - |
dc.type | Article | - |
dc.identifier.email | Fang, X: xiangf@hku.hk | - |
dc.identifier.email | Liu, Y: yangliu5@hku.hk | - |
dc.identifier.authority | Fang, X=rp02587 | - |
dc.identifier.authority | Liu, Y=rp02326 | - |
dc.identifier.doi | 10.1016/j.jfineco.2020.05.010 | - |
dc.identifier.scopus | eid_2-s2.0-85102752038 | - |
dc.identifier.hkuros | 321675 | - |
dc.identifier.volume | 141 | - |
dc.identifier.issue | 1 | - |
dc.identifier.spage | 217 | - |
dc.identifier.epage | 233 | - |
dc.identifier.isi | WOS:000661321500012 | - |
dc.publisher.place | Netherlands | - |